GAO: Leveraged Lending Not a Significant Risk

While financial regulators flagged an increase in leveraged lending prior to the outbreak of COVID-19, a new report from the Government Accountability Office today found that as of September, “they had not found that leveraged lending activities had contributed significantly to widespread financial instability.”

While leveraged loans were affected by the initial COVID-19 shock in March, “the highest-rated [collateralized loan obligation]securities remained resilient,” the GAO noted. “Present-day CLO securities appear to pose less of a risk to financial stability than did similar securities during the 2007–2009 financial crisis, according to regulators and market participants,” the government watchdog observed. “For example, CLO securities have better investor protections, are more insulated from market swings, and are not widely tied to other risky, complex instruments.”

The GAO recommended additional steps the Financial Stability Oversight Council could take to more closely monitor financial stability threats and respond accordingly, such as conducting scenario-based exercises to evaluate its capabilities for responding to crises.